1. Monetary Law and Monetary Policy 15. Blockchain and cryptocurrencies
Dr Marek Porzycki
Chair for Economic Policy

2. Issues covered Cryptocurrencies – concept and practical use
Are cryptocurrencies money?
Are cryptocurrencies Ponzi schemes?
Blockchain: the technology behind cryptocurrencies
Other uses of the blockchain
„official cryptocurrencies”?
Cashless money based on blockchain?

3. Cryptocurrencies – concept and practical use
digital tokens intended to function as medium of exchange ( functions of money)
based on cryptography to secure creation of tokens/units and perform transactions
decentralized control ( blockchain): no single issuer comparable to a central bank, collective creation ( „mining”) and recording of transactions
anonymity, possibility to conduct transactions outside the formal banking system and outside government control
traded on decentralized exchanges/trading platforms

4. Bitcoin
The first and most important cryptocurrency created in 2009 by an unknown person or group of persons under the name Satoshi Nakamoto
Supply capped by design at BTC (maximum total number to be created by „mining”)
High price volatility: in 2017 BTC rose from below $1000 to all-time high of ca. $ before falling to ca. $ in January 2018

5. Are cryptocurrencies money?
Means of payment?
Universal acceptance?
Measure of value?
No legal tender status 
under Polish law „a measure of value different from money” (Art § 2 of the Civil Code), an asset subject to property rights and/or obligations;
status according to CJEU judgment of Skatteverket/David Hedqvist (C-264/14): BTC is a „contractual means of payment”; exchange between BTC and actual currencies is not subject to VAT (under the „currency exemption” covering exchange of „currency, bank notes and coins used as legal tender”).
No known issuer  cryptocurrencies cannot be usually considered financial instruments or electronic money under financial market regulations

6. Controversies about cryptocurrencies
High price volatility  the bitcoin bubble
Are cryptocurrencies a Ponzi scheme/pyramid scheme?
Use in criminal activities („dark net”, organized crime, ransomware etc.)
safety – disappearing or bankrupt bitcoin exchanges

7. Blockchain
Continuosly growing list of records (blocks) created and secured by cryptography
Each subsequent block linked to previous blocks; previous blocks cannot be altered without altering all subsequent blocks
Timestamp used to confirm/secure creation time
Managed by a peer-to-peer network  no single participant is able to control or modify records
A tamper-proof construction  inherently resistant to modification of the data
Distributed ledger technology  decentralized databases spread across multiple locations, managed by different entities, with modification possible only with consent of all participants ( tamper-proof). A broader concept than blockchain.

8. Uses of the blockchain and/or distributed ledger
„blockchain 2.0” – use of blockchain beyond cryptocurrencies
Useful technology to create tamper-proof databases:
real estate registers;
transaction records by banks;
public health databases;
fintech sector;
etc.
„smart contracts” – transactions conducted without any participation of third parties, yet trackable and irreversible.

9. Cashless money based on blockchain?
Research projects done by i.a. the Bank of England (see currencies)
central-bank issued digital currencies/ Digital Base Money  direct access of the general public to the central bank’s balance sheet  everybody will be able to hold central bank money and use it for cashless transactions?
- see questions related to central bank digital currencies from the BoE website: /media/boe/files/research/cbdc.pdf
in Poland: ePLN project vaguely discussed among experts cooperating with the Ministry of Digital Affairs but disowned by the Ministry. Conservative approach of the NBP.

10. Questions on the influence of central bank digital currency for the monetary system
Will it reduce the role of commercial banks?  possible influence on the money creation mechanism as fractional reserve banking may become partially obsolete
Will central banks apply interest rates to central banks digital currency held by the general public?
Relation of central bank digital currency to physical cash? Will it exist alongside cash or rather enable central banks to abolish physical cash?

11. Some additional reading
In English:
R. Ali, J. Barrdear, R. Clews, J. Southgate, „The economics of digital currencies”; „Innovations in payment technologies and the emergence of digital currencies”, BoE Quarterly Bulletin 2014 Q3, bulletin/2014/innovations-in-payment-technologies-and-the- emergence-of-digital-currencies.pdf; currencies/the-economics-of-digital-currencies.pdf
Speech by Y. Mersch, ECB Executive Board member, on Digital Base Money, Jan n.html
In Polish: materials of a project in the Ministry of Digital Affairs (Ministerstwo Cyfryzacji, „Strumień Blockchain/DLT i Waluty Cyfrowe”), in particular legal analysis by K. Zacharzewski and K. Piech: cyfrowej-polski/strumien-blockchain-i-kryptowaluty